NCLT says advance paid by real-estate developer to property owner qualifies as Operational Debt under IBC

NCLT says advance paid by real-estate developer to property owner qualifies as Operational Debt under IBC

The Tribunal held that the execution of Development Management Agreement would have qualified the petitioner to claim the Development Management Agreement fees which is an operational debt

The National Company Law Tribunal (NCLT), Mumbai bench comprising of two member Suchitra Kanuparthi (Member Judicial) and Chandra Bhan Singh (Member Technical) admitted a petition filed by Sunteck Realty Ltd under Section 9 of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) against the respondent - Goodwill Theatres Private Ltd for initiating corporate insolvency resolution process is admitted.

The NCLT observed that the advance paid by a real-estate developer to a property owner for a re-development project meets the merit requirements as operational debt under the IBC, 2016.

Brief facts of the case:

The parties had executed a term sheet in August 2018 after the respondent/corporate debtor (CD) approached the petitioner for the redevelopment of his property. The petitioner claimed to be a real-estate developer who approached the NCLT against the CD for nonpayment of Rs 3.12 crore.

In accordance with the term sheet, the petitioner had paid an amount of Rs 2.51 crores as an advance payment. According to the term sheet, if in case of failure to execute the Development Management Agreement within 60 days, the term sheet would automatically be terminated unless mutually extended in writing is given and the CD would re-pay the advance along with the interest.

However, both the parties mutually agreed to terminate the Term Sheet and accordingly the Development Management Agreement was never executed between the parties in terms of the Term Sheet. Thus, it was contended by the petitioner that CD ought to have paid the amount of Rs 2.51 crores to the Petitioner immediately.

The petitioner claimed that in view of execution of Term Sheet, it was an Operational Creditor under the IBC, 2016 and therefore, claims that the advance money paid by the Petitioner to the Corporate Debtor for availing goods and services is an ex-facie debt under IBC, 2016.

Petitioner further argued that under the term sheet, the corporate debtor had agreed to appoint and engage the petitioner for the performance of the services. The petitioner claimed that the advance money paid for availing goods and services was an ex-facie debt under IBC and that the advance amount paid by it to the CD was never returned despite repeated reminders.

Per contra, the CD remarked that the petitioner was not an Operational Creditor in terms of the IBC, 2016 and the Term Sheet is not a binding agreement between the parties. The Term Sheet was merely an agreement to enter into an agreement and is not a concluded agreement between the parties. Further, the Petitioner has not provided any goods or services to the Corporate Debtor to claim relief under Section 9 of the IBC, 2016, stated the CD.

Ruling of Tribunal:

The Tribunal after hearing both the parties highlighted that by virtue of the 'binding term sheet', the CD had agreed to appoint the petitioner as its project manager for the performance of the services in relation to the project.

The Tribunal further observed, "intention of parties while executing the binding Term Sheet clearly indicate that the Petitioner was engaged to perform the services in relation to the project as an agent/contractor on behalf of the owner and the Project Manager to accept an engagement to undertake, provide and carry out such services subject to payment of Development Management Agreement fees by the Corporate Debtor. The mutual obligation and covenants as detailed in the binding Term Sheet and thus demonstrates that this is the service which was required to be provided by the Petitioner to the Corporate Debtor and hence, this is construed to be an Operational Debt within the meaning of Section 5(21) of the IBC, 2016".

The NCLT ruling was delivered on 7 January 2021.

The NCLT ruled that the amount of Rs 2.51 crore as paid to the CD was part of the service rendered by the petitioner to the CD and thus, was qualified as Operational Debt in terms of Section 5(21) IBC, 2016.

The NCLT further concluded that the execution of the Development Management Agreement would have qualified the petitioner to claim the Development Management Agreement fees which is an operational debt.

However, the Development Management Agreement was never executed, the termination of the binding term sheet prompted the liability of refund of money which could be construed as the part of the operational debt and part services rendered to the CD in accordance with mutual obligations set out in the term sheet. Hence in the light of foregoing observation, NCLT accordingly opined that it was a fit case for admission and order of moratorium under Section 14 IBC, 2016 was passed.